Asset managers have been cutting back on sending orders to brokers’ program trading desks in favour of self-managing their flows using algorithms that send orders directly to exchanges, or through their brokers' electronic trading desks.
Buy-side traders say they have been increasingly splitting orders on account of overlap between the two desks. This comes amid decreasing equity market activity and shrinking commission pools.
The role of program trading within an investment bank hit headlines last month when Nomura announced it would move its agency execution business – including both program and electronic trading – to its agency broker, Instinet.
The Japanese bank’s joint head of equities for Asia-Pacific, John Adair, noted conflicts involved in running agency and principal businesses in parallel, suggesting ultimately it would backfire to impact its equity trading business.
Traditionally fund managers have sent orders through program trading desks during periods of large flows involving trading of multiple stocks. Such flows often coincide with the month-end need to rebalance portfolios or during rebalancing of indices tracked by managers’ funds.
Richard Coulstock, head of dealing at Eastspring Investments (Singapore), estimates that 40% of all his team’s non-cash sales volume went through program trading desks six years ago, now the split is equal with electronic trading.
One reason is that some metrics have shown his team can get better execution by trading electronically themselves rather than passing orders to a broker’s program desk, he notes.
“We find that traders at program trading desks would often not understand the difference between benchmark and strategy,” says Coulstock. “For example, if our benchmark is implementation shortfall, program traders would automatically use an implementation-shortfall algorithm, ignoring strategies that may be more appropriate allowing for market conditions.”
Independent analysis has shown there are times when using volume-weighted average price (Vwap), for example, would have given better results against benchmark, he adds.
While another buy-side trader and several sell-side heads of execution agree there is some overlap between program and electronic trading desks, they suggest the latter is more limited to low-touch, less complex and stock-driven order types.
In fact, they suggest increased use of electronic trading by regulators and investors requires a redefinition of program trading, which is expected to deliver advisory-style hand-holding for clients as sales traders provide complex portfolio-level instructions.
Khaleel Mohideen, head of Asia-Pacific program trading at Credit Suisse, notes it has evolved over the past two years to focus on complex agency transactions across multiple markets or illiquid names, while standing ready to provide capital to clients.
With demand growing for trading indices and exchange-traded funds, the need to rebalance large portfolios based on closing benchmark levels has fuelled demand for program trading desks to provide execution capabilities incorporating bank facilitation desks to offer capital commitments.
“Over the last few years there has also been an increase in Asian domestic investors trading global portfolios who look at program trading desks as their single touch point for executing global trades,” says Mohideen.
“Amid this demand, program trading sales traders are expected to provide global execution expertise by offering local market knowledge, pre-trade and quantitative advisory aside from execution capability.”
But whether a fund manager would have the flexibility to move orders freely across program trading and electronic trading desks is also a function of the size and liquidity of stocks in the fund being managed.
Stephane Loiseau, head of cash equities for Asia-Pacific at Société Générale, notes a small/mid-cap manager, for example, would likely need to talk to sales traders on program desks to source liquidity, or discuss whether they need capital commitment from a broker to complete the order.
Meanwhile, a manager of a large-cap fund whose constituent stocks are more liquid would have greater flexibility to choose electronic trading.
Loiseau says SG’s quant team is focused on developing and back-testing algos to be shared across the two desks based on client execution needs and evolution of market micro-structure.